The rise and fall of Enron is an important, complex story. In its early
days Enron did the right things for the right reason and garnered substantial
credibility. Later successful operations were replaced with the illusion of
successful operations. In the last phases Enron milked its credibility to
sustain operations through loans. When its credibility with lenders crumbled the
loan funds dried up and the corporation imploded. It is reminiscent of the old
cartoon of the wily coyote who runs off a cliff. For a period of time after
the coyote leaves solid ground he is suspended and tries by furious windmilling
to stay suspended but eventually plummets to the ground. In Enron's case the
magical period of suspension after it had left the solid ground of economically
profitable operation lasted for years.

The complex story of Enron can be most effectively told if it is dismembered
as follows:

Natural gas, primarily methane, was originally an unwanted byproduct of
petroleum extraction. For many years when an oil well vented gas it was
simply flared; i.e., burned off. But people eventually learned the uses and
virtues of natural gas and built pipelines to convey it to the cities where it
took the place of coal gas for residential and industrial lighting and heating.

The market for natural gas has three major types of economic units: 1.
Suppliers, 2. Customers, 3. Pipeline companies. In a competitive market the
fluctuations in the supply of natural gas creates fluctuations in the spot
market price of gas. Such uncertainty in the price of gas creates problems for
the suppliers and customers. The suppliers who are making decisions about
exploration for natural gas worry that they may invest in development of fields
only to find a downturn in the market price which may result in losses. Customers,
such as electrical power generators, face investment choices between equipment
to use natural gas or fuel oil. They worry that they may invest in equipment for
one type of fuel and later find the alternative would have been more economical.
This led to businesses entering into long term contracts for natural gas. It
also led to the government trying to eliminate the price uncertainty by price
controls. The natural gas industry became heavily regulated. The unavoidable problem
of price controls is market shortages.

Often the participants in an industry under price controls do not perceive
the source of the shortages as being price controls. In the case of the pipeline
companies, particularly in the late 1970's and early 1980's, they had customers
whom they could profitably serve if only they had additional supplies of gas.
The pipeline companies entered into long term contracts with suppliers to take
all the gas the suppliers wanted to sell them at a specified price. Those long
term contracts could have specified the maximum amounts the pipeline companies
were committed to purchase but they did not. At the time it seemed to the
pipeline companies that they could use all the gas they could get. These long
term contracts to buy any amount of gas at a specified price were called take
or pay contracts.

When the demand for natural gas declined in the 1980's the
pipeline companies found themselves committed to purchase gas for which they had
no customers. This put the pipeline companies with take or pay contracts
in a financial bind. The situation became worse when the government started to
deregulate the industry. The flood of gas developed brought the price of gas
down and the pipeline companies found that the take or pay contracts
committed them to buying an unlimited amount of gas for long contract periods
above the market price of gas. Under such take or pay contracts the
suppliers could not only market their own production at above market prices but
buy up gas on the market and extract a premium from the pipeline company they
had a contract with. It is easy to see how the pipeline companies in the 1980's
would be under financial stress to restructure.

The core of Enron was the merger of Houston Natural Gas of Houston, Texas and
InterNorth, a natural gas pipeline company of Omaha, Nebraska. Houston Natural
Gas had pipeline running east-west and included lines for serving the Florida
market and the California market. InterNorth's pipelines ran north-south and
served the Iowa and Minnesota markets.

InterNorth had been operated conservatively and had little debt. This made it
a target for corporate raiders who sought to use its cash holding and borrowing
capacity to extract funds for themselves. After fending off one takeover attempt
InterNorth officials were looking for another pipeline company to merge with
that would reduce their attractiveness to corporate raiders. They found it in
Houston Natural Gas. Houston Natural Gas had borrowed to make justifiable
acquisitions of pipelines to the Florida and California markets.

At that time the executive control of InterNorth had passed from an executive
who had pursued cautious, conservative policies to Sam Segnar, who lacked
executive experience. Segnar initiated negotiations with Houston Natural Gas for
a merger. The negotiations for Houston Natural Gas were handled by John Wing, an
individual of extraordinary talents. Wing managed to negotiate a price for
Houston Natural Gas shares that was about 40% higher than the current market
price of the shares and furthermore got an agreement that after 18 months Segnar
would retire and turn over management control of the merged company to Kenneth Lay
and the executives of Houston Natural Gas. InterNorth was much larger than Houston Natural
Gas so John Wing had negotiated the takeover of a larger company by his smaller company.

The top people of Houston Natural Gas did move to Omaha. They did not have to
wait 18 months to take control of the company however. The Board of Directors of
InterNorth fired Sam Segnar early and made Kenneth Lay the head of the company.
The InterNorth people did extract a concession that the corporate headquarters
of the merged company would remain in Omaha.

Although the headquarters of the merged company did remain in Omaha for a
period of time there were legitimate business reasons for a natural gas company
to be located in Houston which was the center of the energy industry. Those
reasons combined with the natural inclination of Kenneth Lay and the other
Houston executives to return to their home territory resulted in the corporation
moving to Houston. At that time the company was known by the awkward title of
InterNorth-Houston Natural Gas. The company sought recommendations for a new
name and the first choice was Enteron. But after it was pointed out that
the word enteron had a technical definition of intestine and was an
entirely inappropriate name for a natural gas company the second choice of
Enron was accepted.

The name Enron has entered the American lexicon as being synonomous
with greed and excessive profit by whatever means possible. Yet Enron was a
corporation that went bankrupt and some of the outrageous corporate misdeeds
occurred in an effort to stave off bankrupcy. The nature of the problem of Enron
was quite different from the public's perception of the corporation.

Kenneth Lay

Enron started out as a natural gas company put together by Kenneth Lay. That
core enterprise was put together, in part, to profit from the deregulation of
the natural gas industry. The enterprise did some things right and gained
considerable credibility on Wall Street.

Trouble in Vahalla

In the course of acquiring companies
the enterprise acquired a team of financial market speculators whose original
function was to hedge the risk that the parent company incurred in its field of
operations. That team of hedgers got involved in market speculation and by luck
and perhaps accounting subterfuge apparently
made a lot of money. The top people at what became Enron thought that those
profits were dependable and they kept the team of speculators, who now were
called traders, as an integral part of the company but tried to disguise
the nature of their operations.

The problem for Enron was that after some successes the traders began to have some
financial failures and Enron was no longer really making a profit. The market
traders, who were effectively just high-stakes gamblers, were no source of
profits but instead a major source of loss themselves. The losses, however,
could be covered up in a number of ways and the deficits covered by effectively
borrowing from Wall Street.

Jeff Skilling

One source of the coverup of the operating losses was the
Mark-to-the-Market accounting that was insisted upon by Jeff Skilling
when he reached the highest level of management of Enron. Mark-to-the-Market
accounting is a legitimate form of accounting for an enterprise involved in
buying and selling securities. It is a very dangerous form of accounting for a
firm engaged in building projects. Under Mark-to-the-Market accounting when a
power plant is completed the entire present and future discounted stream of net
cash flows are entered into the accounts as a credit. For example, suppose a
firm decides to build an electrical power plant which is going to last 50 years
and is expected to bring in a net cash flow of $1 million per year. The present
value of those fifty years of a million dollars a year, when the market interest
rate is 10 percent, is $9.9 million. If the plant cost $4 million to construct
that is a net gain of $5.9 million. Under the Mark-to-the-Market accounting
system Enron was using the completion of that power plant which would show up as an
entry of $5.9 million even thought the company had not yet received a penny of
revenue.

Note that in the above it was said that the power plant was expected
to earn $1 million per year. What if that expectation was not fulfilled? Suppose
that events led to a reduction in the expections to $800,000 per year for the
fifty year life. Under Mark-to-the-Market accounting that is taken care of by
entering a subsequent loss when the expectations changed by $2 million, the
difference between the present value of $1 million per year and $0.8 million for
fifty years when the market interest rate is 10 percent. The practical problem
is that once the corporation has booked a $5.9 million it is very difficult to
get any one to agree to book a loss resulting from a change in expectations. So
the firm under Mark-to-the-Market ends up with its accounts highly slanted to
dubious initial expectations about the projects.

Andrew Fastow

The other major way Enron disguised its losses was to keep the borrowing
necessary to finance the deficits off the books. This was arranged by
Chief Financial Officer Andrew Fastow. The accounting rules allowed borrowing to
be kept off the books if a portion of the source of the borrowing was from
lenders outside of the company. The portion was surprisingly small and Andrew
Fastow found it relatively easy to put together lending packages to the company
that were only nominally from outside of the company.

Rich Kinder

It should be noted at this point that before Jeff Skilling headed the company
it had from 1990 to 1996 a real manager, Rich Kinder (KINN der), who operated
the company based upon cash flow performance. Kinder was a lawyer by training
and came to Enron by way of Enron's acquisition of Florida Gas. Kinder and Lay
had both been trained at the University of Missouri. Ken Lay over the years
became more or less a political public relations specialist, Jeff Skilling was a
brilliant business concept man and Rich Kinder was the real, brass tacks
corporate operations manager. With those talents the three of them were an
awesome force. Unfortunately, due to nonbusiness circumstances, Enron lost Rich
Kinder. Jeff Skilling moved into the job of CEO for Enron but Skilling,
brilliant though he may have been, did not have the management skills that
Kinder had. Without the anchor of Rich Kinder the Enron ship went adrift and
eventually collided with hard cash-flow reality.

After he left Enron, Rich Kinder went on to build a multibillion dollar energy company, Kinder Morgan, proving
that his was the talent, rather than those of Lay and Skilling, which was the essential,
critical factor in building a business.

Enron had a great array of foreign assets such as powerplants and pipelines
that were not doing as well financially as the company hoped and counted on in
its accounting. Enron set up a subsidiary in 1997 called Whitewing. Whitewing
was created to purchase the underperforming Enron assets. Whitewing was then to
sell off the underperforming assets. As a subsidiary the financial state of
Whitewing would show up in the accounts for its parent company Enron. In 1999
Enron sold off slightly more than half of Whitewing so it would not be treated
as a subsidiary in the accounts of Enron. Whitewing was created to buy the
underperforming assets from Enron at a generous price, a price higher than it
could sell those assets for. So Whitewing was destined to take losses on its
assets acquired from Enron. In order for Enron to find buyers for the half share
in Whitewing it had to agree to compensate Whitewing for any losses on its sale
of the underperforming assets with shares of Enron stock. A group of investment
bankers was found to acquire the half share of Whitewing.

Here is how Whitewing would enable Enron to hide a failed investment project.
Suppose Enron built a small power plant for $8 million expecting the project to
be worth $10 million and entered a $2 million profit on its books. When the
power plant did not perform up to expectations and had a market value of only $7
million Enron should have cancelled the $2 million profit and entered a $1
million loss on its accounts. Instead it sold the plant to Whitewing for $10 million thus
validating its booked $2 million profit. Whitewing would then sell the power
plant for $7 million and get $3 million worth of Enron stock under the
agreement. The $3 million of stock issued to Whitewing would not show up as a
loss for Enron and thus Enron would have turned a $1 million loss on an
investment into a $2 million accounting profit.

Teeside, England

One of the first foreign projects of Enron, under the guidance of John Wing,
appeared to be spectacularly profitable. The project was the building of a
gas-powered electrical generating plant at Teeside, England. There were many
discouraging aspects to the project but John Wing was able to drive through them
to project completion. England had an energy economy historically based upon
coal. Coal mining had become more and more costly over the years and the
government nationalized the coal mines to keep them operating. The coal miners
through their union were a potent force in British politics that had gained
political protection for their industry. One of those protections was a law
declaring illegal the use of gas for electrical power generation.

But in the time since that protection had been enacted Britain had acquired
natural gas sources in the North Sea. And more recently Britain had acquired a
prime minister, Margaret Thatcher, intent upon bringing rationality to the
social welfare state that existed. John Wing got the necessary approval for
building the Teeside plant and negotiated a long term contract with the
companies operating the offshore natural gas wells. The contract called for
Enron to purchase much more gas than it needed for the Teeside plant but the
expectation was that Enron would be able to market the excess. The problem later
turned out to be that the market price of natural gas in Britain fell below the
contract price and Enron spent years resolving this problem. But the initial
perception was that Teeside was a resounding success.

The Dabnol Power Project in Maharastra State, India

John Wing left Enron but before he did he tutored his assistant Rebecca Mark
in his style of project development. Teeside created the feeling that if the
political and financing problems of power plant projects could be overcome then
that guaranteed the success of the projects. John Wing seemed to have an
instinct for the profitability of projects that Rebecca Mark lacked. She was
able to guide the projects through the approval stages and even the completion
stages but in many cases the projects were still financial failures. The worst
case of this was the Dabnol power plant in the western Indian state of
Maharastra.

Politics in India are complex and perhaps unfathomable to outsiders. It was
foolish for Enron to get embroiled in this matter. But the economics of Dabnol
were dubious even aside from the political quagmire. The plant was very
expensive and there is serious doubt whether the West Indian economy could
afford such expensive power. Indians wanted more power but a significant portion
of the existing power supply was simply stolen. Urban and rural users simply
tapped into the power lines, as they do in most Third World countries. Or they
wired around their power meters so their use was not recorded and billed for.
Other users simply got electrical power at prices below the cost of generating
it. These users felt they had an entitlement to subsidized electricity. Such
losses on the generation of electrical power by the state-owned power companies
placed a major burden on the government. That financial burden had to be covered
by taxing the existing businesses which discouraged their operation and
development.

It is not politically feasible to curb even the theft of electrical power
because the power thieves constitute a significant bloc of the electorate and
will punish electorally any politicians who try to stop the theft of power.
Another bloc of the electorate is dependent upon subsidized power. Into this
electrical-entitlement culture comes Enron with a plan for a very expensive
plant for producing power.

The Dabnol plant was a multi-billion dollar operation to be built in two
stages. The first stage involved the use of naphtha as fuel. Naphtha is a
petroleum derivative in between kerosene and gasoline in volatility. This fuel
would have to be imported and India had a political climate that disdained
imports because India had relatively little in export earnings to pay for such
imports. But the second stage was much more expensive and technologically
sophisticated than the first. The second stage was the conversion of the plant
to the use of liquified natural gas (LNG). LNG requires very expensive
infrastructure. The LNG would have to be brought to a special port by
refrigerated tankers costing hundreds of millions of dollars each. The port for
handling such tankers was correspondingly expensive as was the facilties for
transporting the gas to the plant itself.

No company wants to undertake such an investment in specialized equipment
unless it has some guarantee of a market. Enron negotiated a contract with the
politicians in the government of Maharastra state that called for payments of
about $1.3 billion per year over a twenty year period. The public multiplied the
annual payment times the number of years and screamed, "$26 Billion!!!" This led
to the political opposition campaigning on a platform of cancelling this Enron
contract. It could well have been that the politicians who contracted with Enron had
no intention of fulfilling the contract but they could not very well say that publically.

The opposition party won the election and their government reneged on the contract. Enron
meanwhile had invested about a billion dollars in the plant. The loss on this
project alone was enough to put the Enron company into financial difficulties.
But in Houston Enron had passed beyond the mundane world of profit and loss into
a nether world of Special Purpose Entity financing.

The Azurix Water Company

A good deal of competition and antagonism existed between Rebecca Mark and
Jeff Skilling. Both expected to advance to the top level of management. When
Skilling got the promotion Mark sought a way to be her own boss while perserving
her ties with Enron. She decided that she would take the expertise that Enron
had developed in the natural gas and petroleum fields to the water industry.

In 1998 she settled upon Wessex Water Co. headquartered in Bath, England as the
nucleus for her international water development company. In July of 1998 Enron
and Wessex agreed on purchase price of a bit under $3 billion. Water treatment
uses a good deal of energy so that offered a possible tie to Enron's other
specialties. The water industry was a regulated utility in most places in the
world and the possibility of deregulation offered an opportunity for Enron to
capitalize on its knowledge of the profit opportunities under deregulation. The
idea of Enron entering the water industry was not totally unreasonable.

Rebecca Mark

Wessex Water was acquired and a new Enron company called Azurix was created.
(The name Azurix has the connotation of blue (azure) like large bodies of
water.) Almost immediately Rebecca Mark started preparing to sell stock in Azurix
to the public. It was unusual for a company to attempt an Initial Public Offering
(IPO) so soon, particularly before there had been a testing of the basic plan of
operation of the company. In the case of the Dabnol plant the problem was the
public's feeling that it was entitled to cheap power. The feeling of entitlement
concerning water was far stronger than any feeling of entitlement to electrical
power.

One of the first ventures of Azurix was the purchase of a water company and
franchise to supply water in the Buenos Aires area. Azurix won the bid but its
bid was almost three times higher than the next highest bid indicating that
Azurix did not know what it was doing. Two other developments gave further
evidence that Azurix was not prepared for the differences between operating a
water company in England and operating one in Argentina. First there was a large
number of missing records of customers. There was a strong possibility that the
employees of the old water company were deleting the names and records of their
friends and relatives so that Azurix would have no way of knowing of their
existence and billing them. Second the customers who came in to pay their water
bills in person had no way of finding the new Azurix offices. Later there was an
algae bloom in the water system which angered the customers and they stopped
paying their water bills.

Azurix's IPO did go through and it raised almost $700 million in the spring
of 1999. But Azurix and Rebecca Mark were spending at a rate exceeding $100
million per month so the IPO funds did not last long. At the beginning of 2000
Azurix had to sell $600 million in junk (below investment grade) bonds. But even
that cash infusion was not enough to stave off the financial collapse of Azurix.
Rebecca Mark retired from Azurix and Enron in August of 2000. For retirement she
sold her Enron shares for something upwards of $80 million.

The early success of Enron engendered a hubris among the Skilling group of
executives that they could make any venture a success. When the apparent success
continued despite the lack of real profits and in the face of cash flow problems
it promoted that notion that real profits did not matter, mark-to-market
accounting profits were enough. At the turn of the millenium the dot.com bubble
was the focus of attention and the Enron people looked for a way to share in the
bonanza of the New Economy where firms had huge valuations despite the
lack of profits or any plausible potential for profits.
The concept they came up
with is the provision of internet service with Enron Broadband Services and the
future possibility of trading rights to broadband capacity as a commodity.
This idea was not so entirely divorced from the pipeline business as
one might think. In 1985 a pipeline company in Tulsa, Oklahoma, the
Williams Companies, began stringing fiber optic cable in some of its
unused pipelines and transferring information instead of energy. In 1995 it sold
this subsidiary operation to
WorldCom for $2.5 billion in cash. It also happened that one of Enron's
acquisitions, Portland General Electric, was involved in creating a
fiber optic ring for the city of Portland. Enron thus thought it had
a natural entry into the New Economy.

Ken Rice

Ken Rice was chosen to head the broadbank project. Rice had come to Enron
from InterNorth and had successfully promoted Skilling's Gas Bank concept by
negotiating contracts for the longterm supply of natural gas.

Rice was well
rewarded by Skilling for his contributions to Enron's success. Rice had become wealthy and
influential within Enron. He no longer had a hunger for achievement so when he
was made head of Enron Broadbank Services he was not the go-getter that he had
been years before. He tended to devote his time to other things such as
racing cars and motorcycles rather than
making Broadband Services work. This might have been alright if the second in
command could fill in for him. But the second in command was Kevin Hannon who
lacked people-skills and generally just irritated people. Hannon had been hired from
Bankers Trust which was the pre-eminent trader in derivative securities. So he
was someone with a sense of high status but with absolutely no technical
expertise in the field of broadband services.

In actuality the project probably would not have worked even if it had more
suitable managers because Enron entered the field along with a flood tide of
other providers. Analysts within Enron were warning that the price of internet
services was likely to fall and continue falling. Any firm surviving in that
commercial climate was likely to be one proficient at economizing. Unfortunately
this was not the type of manager Ken Rice was or wanted to be. He was more
interested in the flashy gesture such as classy motorcycles on display at the
company offices.

But Enron did launch its Broadband Services quite spectacularly in
January
of 2000. At a meeting of financial analysts Enron had Scott McNealy, the CEO of
Sun Microsystems, announce that his company would supply 18,000 of its internet servers for
the fiber optics equipment of Enron Broadband Services. This was a public
relations triumph and the price of Enron stock jumped 25 percent.

In July of 2000 Enron was able to announce another coup. It
had negotiated a contract with Blockbuster, the video rental company,
to create a movies-on-demand network. Although this alliance sounded
promising it turned out that with the amount of investment in expensive
equipment that Enron would have to make it would be virtually impossible
for Enron Broadband Services to derive a profit from it. An analyst
at Enron estimated that to just break even on the investment the
project would have to have about one half of all American households
as subscribers and these subscribers would have to be watching on average an
implausibly large number of movies (such as ten) per week. Otherwise
the project would be losing hundreds of million, if not billions, of
dollars per year. The financial world however did not know this.

Six months later however some of the polish was wearing off the
Enron image. At a meeting of stock
analysts that Enron called in January of 2001 Jeff Skilling tried to make the
case that Enron stock, selling then at about $80 per share, was undervalued. He
asserted that it was worth $126 per share and that Enron Broadband Services,
despite its having lost $60 million on revenues of $408 million in 2000, was worth $40 in
Enron share price.

Some analysts at that presentation did not believe the Enron story and said
in print that Enron was overvalued at its current price and should sell for more
like $53 per share. Generally Enron could keep financial analysts in line
because it had a lot of financial business their institutions would lose out on
if they ever said anything pessimistic about Enron. The analysts that said Enron
stock was overvalued worked for a financial research company that did not
provide financial services. They were not worried about offending Enron.

By 2001 Enron Broadband Services was hemorrhaging money. In the first quarter
it lost $35 million on revenues of $83 million. Notice that the
revenues was down from about $100 million per quarter in the previous
year and the losses up from about $15 million per quarter. In the
second quarter of 2001 the picture got even darker. There was a loss of
$102 million on revenues of $16 million.

At a time when the prospects for Enron Broadband Services were
looking very bleak Andrew Fastow came to the rescue with one of his
Special Purpose Entities called LJM2. LJM2 purchased the fiber cable
capacity of Enron Broadband
Services at an inflated price which allowed Enron Broadband Services to
book a profit. But LJM2 bought the fiber cable capacity with a
guarantee that Enron or one of its subsidiaries would buy it back
for LJM2 at an even higher price. If such financial legerdemain could
turn the catastrophic losses of Enron Broadband Services into a
booked profit then it could do anything.

The cases of corporate management expending corporate funds for luxuries are
inumerable. It is only the fortunate stockholders who have management that is
frugal with their funds. But in most cases the prodigal managers are expending
the corporate profits. In the case of Enron the managers in the latter stage of
the firm operation before its bankrupcy the luxuries were paid for from the
firm's borrowing because it had no real profits. Thus those extravagances were
at the expense of the company's creditors rather than its stockholders.

One common extravagance of corporate managers is on corporate airplanes.
These corporate airlines costs many, many times what the travel would cost on
commercial airlines. This is not only because of the high operating costs (in
the neighborhood of $5 thousand per hour) but also because often the corporate
plane flies without any passengers to pickup the corporate executives (or family
members or friends) and takes them to their destination and flies back to the home
base again without passengers.

When Rich Kinder was effectively in charge of day-to-day operations of Enron
he kept Airline Enron under tight contol. There were corporate aircraft
but most of them were purchased over his strenuous objections. During Kinder's
time there were five corporate aircraft, two of them Cessna Citations. The
Cessna Citation was a relatiavely low cost jet that would carry six passengers
at 400 miles per hour. Its hourly operating cost was $1500. It was also small
enough to take to the smaller landingstrips where real corporate pipeline
business required Enron to visit. This was not true of the larger corporate jets.

When Kinder left Enron the staff waited expectantly to see how many corporate
airplanes Ken Lay would buy. They did not have to wait long. A few weeks after
Kinder left, the company sold the Cessna Citations and bought two Hawker 800's to
replace them. The Hawker 800's were bigger and faster and more expensive
than the Cessnas. They cost $10 million a piece and cost $4200 per hour to
operate.

Kinder was able to severly limit the use of the corporate aircraft to company
business. With Kinder gone the personal use of the aircraft esculated. For
example, Lou Pai had a ranch in Colorado. Every time he went to visit it using
Airline Enron it cost the company about $45,000.

Enron moved up from the Hawker 800's with the purchase of two Falcon 900's. A
Falcon carries 13 passengers but has a price tag of $30 million and cost about
$5200 per hour to operate. Also another Hawker 800 was purchased so Airline Enron
consisted of six planes.

In March of 2001 Ken Lay decided that the prestige of Enron required an even
bigger airplane. He petitioned the Board of Directors of Enron for the company
to purchase a GulfStream-V (five) corporate jet. This plane would carry 16
passengers and could fly nonstop from Houston to Europe. Its cost was $42
million. Surely Enron could afford such necessities; it had lost only $464
million in that first quarter of 2001.

Another Enron executive who was notorious for extravangant cost of air travel
was Rebecca Mark. Rebecca Mark, as head of Enron International, did have a great
deal of required air travel. She insisted upon using the corporate planes even
when it involved flying her as a single passenger half way around the world.
Some felt that most of her trips were not really justified. But nevertheless
when a corporate airplane was not available she charted a plane at a cost
estimated to be $100,000. An outlay like this made even the corporate airplanes
seem to be bargains for air travel.

When a firm has control over the supply of a product as a result of
being the only supplier or as being a member of a cartel then it may
make extraordinary profits by reducing the quantity supplied to the
market and driving up the price. An Enron subsidiary became infamous for
its gaming of the rules in the California energy market. However if one
looks beyond the crass remarks of the Enron traders they were simply
reducing the supply as any monopolist would do. In the case of the
California energy market they were dealing with a product with a
highly inelastic demand so the monopoly price was not just a bit higher
than what existed before; it was on the order of a ten-fold increase.

Because this seeking of monopoly profits comes from the firm having
effective control over the market price, the solution is simply to
take away that control of price by a government-established control price.
When the natural monopoly or a cartel cannot raise the price by reducing
the quantity supplied then they go ahead and supply the market at the
control price.

Bankruptcy does not mean a company ceases to exist. It means that
it cannot pay its contractual obligations and seeks protection from
its creditors through the courts. In return for holding the creditors
in abeyance the court takes charge of arranging the ultimate disposition
of the company's assets in satisfying the debts of the company.

Enron was not devoid of assets. It in fact had billions of dollars
worth of assets. The problem was that it had more liabilities than
it had assets. More particularly it ran into insurmountable cash flow
problems. Also some of the assets like the power plant Dabnol in
India were white elephants. A white elephant is an
asset that is potentially valuable but at the present has no
benefit.

In 1999 Jeff Skilling was raising cash by selling off assets.
The assets for which there was a market, such as Enron Oil and
Gas, were the ones that were well-run and producing cash. Skilling sold
Enron 53% interest in Enron Oil and Gas for about $600 million.
This was a help but Enron had a burn rate for cash in its various
projects that was at the hundreds of millions of dollars level.

Skilling did try in 2000 to sell Enron's herd of international white elephants,
projects that had a book value of upwards of $7 billion, to investors in the United Arab Emirates but the deal
fell through.

(To be continued.)

The Debacle and Denouement

In 2004 the top executives of Enron, Kenneth Lay and Jeff Skilling, were indicted. They
were tried and
convicted in 2006. They are yet to be sentenced in 2006, but the public was expecting
sentences to involve terms of years in prison. Before imprisonment
could be imposed Kenneth Lay, at age 64, died.

Some people, even ones that should know better, assert that greed was behind the
collapse of Enron. Here are two dictionary
definitions of the word greed:

An excessive desire to acquire or possess more than what one needs or deserves,
especially with respect to material wealth. (Webster’s Unabridged Dictionary)

First of all these definitions are defective, but more importantly the assertion that
greedper se was behind the collapse ignores the obvious point that Enron
collapsed because it was losing money and had been doing so for a long time. Enron lost money
because its management made some disasterous decisions. Typically these disasterous decisions
were from over-and-unjustified confidence in their ability to manage. They went into risky fields
where they had no experience and failed, failed miserably. They developed an expertise in
disguising and covering up these failures, but ultimately these financial failures showed up on the bottom line.
The relevant failings of the Enron management was mismanagement, their crimes had to do with
violating rules and not with greed according to the dictionary definitions. However,
the dictionary definitions are defective because what people have in mind in the use of the
term greed is an inordinant desire for wealth leading to a violation of moral or
legal rules. No one classifies the Beatles as being greedy even though they made a lot of money
and consciously put forth effort to do so. Ivan Boesky made a lot less money than the
Beatles but he was classified as being greedy because he violated the rules. The salaries
and stock options received by the Enron management were set by the board of directors of
the corporation. They may have been high, particularly in relation to the quality of the
management performance, but they were not what produced the collapse of Enron. The illegal
acts were carried out to stave off collapse rather than what caused the collapse. The collapse
came as a result of management errors, management errors that were driven by unjustified
overconfidence.